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Model Porrfolios

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My company is switching plan vendors from Valic to Metlife. Our new investment options will include a few Vanguard and DFA funds and 5 different model portfolios. We were able to get these fund because our plan will be managed by a certified financial planner and he worked it out with Metlife to get these funds. Here's a moderate model portfolio and the total expenses will be 1.11% which includes fund and service fees. I'm a little concerned about the fees, but I know these are really great funds:

 

DFA In't Value 6%

American Funds EuroPacific 4%

Vanguard S&P 500 10%

American Funds Growth Funds of America 6%

DFA US Large Value 14%

Vanguard REIT Index Adm. 2%

DFA US Small Value 6%

DFA US Micro Cap 4%

Calamos Growth 4%

DFA Emerging Markets Value 4%

Metlife Fixed Account (paying 3%) 20%

DFA 5 Yr Gov't Bond 10%

Vanguard S/T Bond Index 10%

 

Any thought? Thanks. Garry

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Great news your company is moving from Valic to this program. I also use DFA and Vanguard funds for my clients. I wasn't aware that DFA allowed there funds to be used with MetLife. Although I wonder why the advisor didn't use more Vanguard and DFA funds in the portfolio (Why use Metlife's Fixed Product?); I think it is great that you have a professional managing the money. Kudos for a good switch.

 

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A couple considerations:

 

1. What is your MVA (market Value Adjustment) formula on the Fixed Account & why such a low rate? (current rates are closer to 4.4% and moving up)

 

2. The fees could be high or low, its a scale business, so how many participants and assets are you talking about?

 

3. Will the plan own the funds or have a contract with Met within which the funds underlie a separate account?

 

4. If a contract, do you know contract charges?

 

With that level of charges and amount of index funds, you are likely locking in a small negative tracking error to a corresponding composite benchmark. Not a bad outcome - as long as you were expecting it.

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Danc,

 

1. I just asked Metlife that question today. I'm guessing 3%, but it could be higher.

 

2. We have about 350 participants with about $6 million in assets.

 

3. The plan will own the funds. There will be no contract charges.

 

If you could, please explain by what you mean by "locking in a small negative tracking error to a corresponding composite benchmark."

 

Garry

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GSC:

 

Are the advisor's duties spelled out in detail? Just what is he/she required to do to earn $350 a year on a 100K account? To what extent is the 35bp simply a residual fee similar to a 12b1 trail?

 

Peace and hope,

Joel L. Frank

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Joel, the advisor has/will:

 

1) Developed model portfolios with Metlife using Vanguard and DFA funds that we normally would not of been able to get on our own. We limited ourselves to what vendors we could use.

 

2) Provide quarterly reviews of the funds in our plan and make recommendations if fund should be replaced.

 

3) Adjust model mixes when necessary.

 

4) Will offer assistance in regard to fudiciary responsibility.

 

I would of preferred to go with TIAA-CREF, but the CEO of the company wanted a company with a local presence. TIAA-CREF is out of town. We believe that this was the best we could do at this point in time. Almost anything is better than staying with Valic.

 

Garry

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Gary;

 

I think your approach is quite good, relative to VALIC and many other approaches.

 

Tracking error is just the amount by which performance of an index fund deviates from its intended benchmark performance. Negative tracking error comes from (among other things) fees. In the exterme, taking a simple case, a perfect replication of the S&P 500 Index with a fee of 1% will result in tracking error of 100 basis points.

 

Now, if you extrapolate that result to a portfolio of index funds, you'll get the weighted average return of the benchmarks (composite benchmark), less 100 basis points.

 

I recognize you do not have an entire portfolio of index funds, so you'll get a result that is not exactly composite index less fees. (You are making some active management bets)

 

Your assessment of the funds and this approach will be highly dependent on the benchmarks (and durability of such benchmarks) you select to track each fund, and by extension - to get the composite result.

 

 

Final comment: You did not include exactly which share class of each fund you are going to be using. The American Funds and DFA Funds are well known to provide significant revenue sharing. Many advisers affiliate with broker/dealers to receive revenues from mutual funds. I just mention this so you do not accidentally pay your adviser twice.

 

Cheers!

 

Danc

 

 

 

 

 

 

 

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Dan,

 

I think you need to do your homework on DFA Funds. It is my knowledge that DFA does not pay additional "revenue sharing" to it's advisors (12b1s, sub tas, etc.).

 

MDN

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